The new world order is one where the flow of external resources especially to emerging economies such as Kenya is shrinking. Indeed, the recent recession in developed countries was a wakeup call to many that the expected resources could one day dry up. This is happening when the need for support is increasing, hence, the need to become self sustainable and to increase the level of resources that can be raised domestically.
Domestic resource mobilization (DRM) refers to the savings and investment generated by households, domestic firms, and government. The need for African countries to mobilize domestic resources as a medium-to long-term goal is now widely accepted. In the past, Africa has been rated poorly as relates to saving and investment. A sustained increase in growth rates require higher level of savings and investment, as well as increased investment productivity. Developing countries and those in transition are at present confronting unsustainable fiscal deficits; unabated debt service charges and declining external assistance, seriously affecting their development process. Domestic tax revenues are the most sustainable source of financing for public expenditures in developing countries. The experience with domestic resource mobilization of developing countries over the last 25 years has been mixed. In countries such as Botswana, Israel, Kuwait and Seychelles, the central government revenue’s share in GDP has been more than 40 percent on average. The issue of tax compliance is extremely important both to those concerned with the key role increased tax yields can play in restoring macroeconomic balance and to those concerned with tax policy and its effects on the economy in general. However, the ability of developing countries’ governments to raise direct tax revenues is constrained by a number of external and internal factors. [...]
Table of Contents
CHAPTER ONE: BACKGROUND
1.1. Introduction
1.2. Domestic Resource Mobilization
1.3. The Concept of Tax Compliance
1.4. What is the Problem?
1.5. Objectives of the Study
1.6. Rationale of the Study
CHAPTER TWO: DEFINITION OF VARIOUS TAX HEADS
2.1. Income Tax
2.2. Value Added Tax (VAT)
2.3. Excise Duty
2.4. Trade Taxes
CHAPTER FOUR: STUDY FINDINGS
4.1. Forecasting and setting of Revenue Targets in Kenya
4.2. Measuring the Tax Gap/ Tax Effort of Each of the Tax Heads
4.3. Impact of Underground Economy on Kenya’s Revenue Potential
4.4. The Impact of Taxpayer Behavior on Revenue Potential
4.5. Transfer Pricing and Revenue Potential
4.6. Impact of Tax Incentives on Revenue Potential
5.1. Overview of the Study
5.2: Recommendations/Way Forward
Annex 1: Analysis of Tax Gap: The Kenyan Case
Annex 2: Value Gap of Pharmaceuticals and Petroleum for 2007
Study Objectives and Scope
This paper investigates the mechanisms for enhancing revenue collection in Kenya by addressing administrative and structural challenges, with a primary objective of identifying strategies to bridge the tax gap and optimize revenue potential. The study evaluates fiscal policy trends, the impact of the underground economy, the role of taxpayer behavior, and the implications of transfer pricing and tax incentives on domestic resource mobilization.
- Analysis of criteria used in setting revenue targets and the causes for underperformance.
- Evaluation of the underground economy's size and its contribution to the tax base.
- Examination of transfer pricing practices and their impact on revenue loss for the state.
- Assessment of tax incentives and their efficacy in promoting investment versus revenue erosion.
- Recommendation of legislative and administrative strategies to formalize untaxed sectors and optimize collection.
Auszug aus dem Buch
1.1. Introduction
Understanding trends in Kenya's fiscal policy paradigm is important in giving direction on the salient issues behind unlocking the revenue potential of the country. Moreover, fiscal policy trend helps in appreciating the underlying external and internal environment that prevailed over time.
At independence, just like many commonwealth countries, Kenya inherited a British oriented tax system. Thus, as it were, the principles and fundamentals of taxation were based on the British model. The objective of the tax system during the pre-independence period was geared towards raising as much financial resources as possible from African households to finance the operations of the colonial Government. During this period little emphasis was given towards provision of basic goods and services in particular to the poorer segment of the society (Africans). Overall, this system was largely indifferent to the impoverished Africans and created exclusive dependency. For example, a hut tax was imposed on all households and male adults above the age of 18 years irrespective of their level of income.
Summary of Chapters
CHAPTER ONE: BACKGROUND: Provides a historical overview of Kenya's fiscal policy, the emergence of domestic resource mobilization, and the conceptual framework of tax compliance.
CHAPTER TWO: DEFINITION OF VARIOUS TAX HEADS: Defines the primary components of the Kenyan tax system, including income tax, VAT, excise duty, and trade taxes.
CHAPTER FOUR: STUDY FINDINGS: Presents empirical analyses on revenue forecasting, tax gap measurement, the underground economy, taxpayer behavior, transfer pricing, and the impact of tax incentives.
Keywords
Domestic Resource Mobilization, Tax Compliance, Revenue Potential, Kenya Revenue Authority, Underground Economy, Transfer Pricing, Tax Incentives, Fiscal Policy, Tax Gap, Tax Reform, Macroeconomic Forecasting, Value Added Tax, Corporate Income Tax, Investment Deduction, Export Processing Zones.
Frequently Asked Questions
What is the primary focus of this working paper?
The paper explores the challenges and opportunities associated with Kenya's revenue potential, specifically aiming to identify ways to increase domestic resource mobilization and bridge the existing tax gap.
What are the core thematic areas addressed in the study?
The study covers revenue forecasting, tax gap analysis, the impact of the informal ("underground") economy, taxpayer culture and behavior, transfer pricing by multinational enterprises, and the economic effects of tax incentive regimes.
What is the central objective or research question of this study?
The main objective is to establish the ways and means of unlocking Kenya's revenue potential by identifying why revenue targets are missed and proposing strategies to bring untaxed areas into the tax net.
Which scientific methods are employed in the research?
The study utilizes econometric models, including the KIPPRA-Treasury Macro Model (KTMM) and the currency demand approach, to estimate the size of the underground economy and tax gaps, as well as Granger causality tests to determine the relationship between GDP and tax heads.
What topics are explored in the main body of the paper?
The main body examines the evolution of the Kenyan tax system, performs a quantitative analysis of tax gaps, investigates the influence of "bazaar-type" business models on tax evasion, and assesses the revenue losses resulting from transfer mispricing and specific investment tax incentives.
How can this work be characterized by keywords?
The paper is characterized by terms such as domestic resource mobilization, tax compliance, transfer pricing, underground economy, and fiscal policy reform.
How does the "bazaar-type" business model affect tax collection in Kenya?
The study suggests that bazaar-type businesses are often individualistic and fragmented, making them difficult to track. These informal setups lead to poor record-keeping, facilitating tax evasion and creating challenges for authorities to bring them into the formal tax regime.
What does the study conclude regarding transfer pricing?
The paper finds that transfer mispricing is a significant issue for Kenya, with evidence of "abusive" pricing—such as the inflation of costs or artificial reduction of profits—resulting in substantial revenue losses, particularly among multinational corporations.
What are the recommendations for minimizing revenue loss from tax incentives?
The study recommends that the government implement proper monitoring mechanisms to prevent abuse of incentives and suggests that incentives should be more strategically targeted to ensure they lead to actual economic growth rather than simply eroding the tax base.
- Quote paper
- Masinde Muyundo (Author), 2012, Unlocking the Revenue Potential in Kenya, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/199589
